Business LANDSCAPE Interview
Hussain Qaragholi
Founder and Managing Partner, Phoenix Finance Partners Ltd.
Hussain Qaragholi is the Founder and Managing Partner of Phoenix Finance Partners, Ltd., a UK-based finance advisory and fintech investment firm.
Hussain has a long career in corporate finance, debt capital markets, and corporate banking. His clients include the International Finance Corporation (IFC), to which he is Senior Advisor on Infrastructure, Manufacturing, Agriculture and Services for the Middle East, Central Asia, and Turkey. He is also an investor and executive board member of FinTech companies in blockchain distributive technologies, payments, and peer-to-peer finance in Europe, the Middle East, and Africa.
Mr. Qaragholi played a significant role in reconstructing Iraq’s pre-2003 debt; in this interview, he talks in detail about this process and how crucial it was for Iraq to reconnect with the international capital markets. Moreover, he reflects on the change in the Iraqi financial infrastructure and capital market in the last two decades, the opportunities in financial technology, the main challenges, and how to make Iraq more investable.
We would love to start with a brief introduction about you.
I was born in Baghdad, and I grew up at the time before the wars and sanctions. We emigrated to the United States in 1980. Any observer of Iraq’s history knows that, unfortunately, the period between 1991 and 2003 probably caused the most damage to Iraq and its social fabric.
I come originally from a political family; my paternal grandfather, Abdulmajeed Mahmoud Al-Qaragholi, went back to Iraq after graduating from the University of California Berkley and Cornell University and was one of the first General Managers of the Iraqi Agricultural Bank in the 1940s. He then moved into politics, first as a member of the Parliament, and then held several ministerial positions as Minister of Economy and Finance, Minister of Oil, and Minister of Youth. My maternal grandfather, Ali Ihsan Nashat Al-Naqshabandi, was a retired Royal Guards officer and became a successful businessman. My grandfathers were an early inspiration to me for public service as well as entrepreneurship.
My father was a graduate of Hikma University in Baghdad. As a Civil Engineer, he developed various water and infrastructure projects throughout the country. When I was a young boy, he used to take me along with him on his work trips and show me with pride his infrastructure projects. Those trips gave me an appreciation of the development of Iraq in the 1970s and fond memories of a hard-working and ethical society.
Fast forward, I grew up in the United States, and went to high school and college there. I completed two master’s degrees in Contemporary Arab Studies and Business Administration at Georgetown University. I then got my first banking job in New York with Merrill Lynch. In 2003, after the change of regime happened in Iraq, I decided to go back and help to financially reconstruct the country where I was born instead of staying in New York and carrying on my finance career.
Can you tell us more about your role in reconstructing Iraq’s debt and how essential it was for Iraq?
In 2003 I was hired by Citibank as their first Iraq Desk Officer. On the finance side, the first order of business for the international community was to re-integrate Iraq with the international capital markets and trade. The Coalition Provisional Authority (CPA) at the time set out to remove the draconian financial moratorium and sanctions imposed on the country after 1991.
All the letters of credit from Rafidain and Rasheed banks in the 1980s were defaulted because oil prices started crashing in the late 1980s, and Iraq could not service those letters of credit anymore. Moreover, after the invasion of Kuwait, the international community imposed a financial moratorium on the country. Hence, Iraq emerged from the wars and sanctions with over $220 billion in debt by 2003.
That would not have been sustainable for any country, especially with the GDP of Iraq at the time; the debt to GDP ratio would have been multiples, which had made Iraq financially bankrupt.
Iraq’s sovereign debt fell into three categories: government to government debt of OECD countries (which they call Paris Club debt); debt to non-Paris Club governments; and commercial debt to private creditors.
We were hired at Citibank, jointly with JP Morgan, to restructure the commercial debt, which equated to $22 billion and was composed mainly of defaulted letters of credit (LCs). A number of these defaulted LCs were sold by the original holders in the international market and were bought by vulture funds. Vulture funds specialize in buying defaulted paper, like letters of credit, from traders, and then they would try to get their money back by suing the borrower in international courts. In this case, it was Iraq.
Due to these defaulted LCs, Iraq’s two largest banks at the time, Rafidain and Rasheed, could not operate as export-import banks for Iraq because of creditor attachment risk from the vulture funds. And that was the reason for the CPA to establish the Trade Bank of Iraq, which was meant to replace Rafidain and Rasheed as the new trade bank.
Iraq’s debt restructuring took three years of my life to execute. I was one of the core team members on that deal. I am honored to have been a part of this because we wiped out 80% of that debt from future generations of Iraqis. That remaining 20% is being repaid over a 28-year period (until 2028). That deal won the prestigious “International Financing Review” Deal of the Year award. I look back at that as one of the most under-told and underappreciated achievements that the international financial community accomplished in initially helping Iraq to reintegrate into the world.
These defaulted LCs were held by European industrial companies, Japanese trading companies, Korean construction companies, as well as small to medium-sized traders selling goods to Iraq. Iraq repaid those in two forms: for the small traders; Iraq paid them in cash. For the big companies, they were given a bond. Big companies are not natural holders of these bonds, and so they ended up being sold and traded in the capital markets. They are called the Iraq 2028 5.8% coupon bond because the last payment due is in 2028, and the interest rate on them is 5.8%. Those bonds were the first that Iraq had issued in the international markets and became the benchmark through which Iraq's sovereign debt would be priced.
Prior to that, if Iraq wanted to borrow from the international markets, there was no benchmark, and so Iraq’s cost of borrowing was anybody’s guess. Those bonds are traded in major financial markets such as New York and London, so at any given moment, one can go on a Bloomberg or Reuters screen to check Iraq's debt prices and what it would cost for the government to borrow. This is how Iraq, on the sovereign level, got back into the capital markets. For any subsequent borrowing, Iraq now had a publicly-available debt price market reference point.
Subsequent to that, while I was at Deutsche Bank, I co-led the team that advised Iraq through other borrowings, including two other capital market issuances in 2017. I also executed a number of structured trade export finance deals for the electricity and energy sector. Iraq now has three international bonds: the $2.7 billion Iraq 2028s bond issued in 2006, the $1 billion 2.14% Iraq USAID 2022s, and the $1 billion 6.75% Iraq 2023s. International investor appetite for Iraq credit was very strong, with the Iraq 2023s being 7x over-subscribed at the time of issuance. These bonds offer a real-time view on investors’ appetite for Iraq credit and how factors such as reliance on oil revenues, government institutional strength, and political stability affect it.
As part of the capital markets issuances, I also worked with our joint-lead bank partners to get Iraq its first sovereign credit rating by the international credit agencies Standard & Poor’s and Fitch.
In addition to creating a benchmark for Iraq in the international capital markets, the bonds and the credit ratings had the added benefit of instilling discipline for the Ministry of Finance and the Central Bank of Iraq—through the publishing of required quarterly and annual financial reports to international investors.
I must give credit here to the Government of Iraq for its management of these complex international finance transactions despite the challenges that Iraq had and continues to face. While the Ministry of Finance was the lead sponsor, the working group included other stakeholders from the Central Bank of Iraq and other ministries. They were truly outstanding accomplishments.
Can we know more about your role with the IFC, and what is their current work focus in Iraq?
I am an advisor to the IFC on infrastructure, manufacturing, agriculture, and services (MAS), including healthcare and real estate; our team focuses on the Middle East, Central Asia, and Turkey. The IFC’s mandate is to support the private sector, and as part of the World Bank Group, they engage in markets where they would make a difference by supporting international investments into the country. Therefore, for countries that are deemed to be high risk, emerging from wars and social strife, such as Iraq, the mandate is to help bring investments into the private sector.
In the Middle East, Iraq is one of the most important countries for the IFC, and they are engaged on several fronts. For example, the IFC supported the Basrah Gas Company (BGC), which is a joint venture between the Iraq South Gas Company and Shell and Mitsubishi. BGC captures flared gas from the southern fields in Iraq, processes that gas, feeds a part of it into the electricity sector in Iraq, and sells the other part internationally at a profit. It is one of the most successful Iraqi public-private partnership companies.
The IFC led a consortium bank that provided financing for the Basrah Gas Company. They successfully structured a $360 million loan facility. This was the first project finance loan secured by the refined product of BGC as well as a corporate guarantee. It demonstrated that Iraqi companies could borrow without having the guarantee of the Ministry of Finance or the Federal Government as an explicit guarantor for this borrowing.
The IFC is interested in supporting Environmental, Social, and Governance (ESG) projects. They are currently supporting the shift towards renewable energy globally. Iraq has tremendous potential in solar and wind, and potentially hydrogen renewable energy projects. The IFC is looking to identify credible and reputable companies that it could partner with to finance their projects in infrastructure and MAS sectors and bring alongside them international and regional investors. In addition, the IFC is working to bring private-sector investment and expertise to the state-owned entities (SOE) that are currently causing a significant drain on the Iraqi budget.
How does this reformation of state-owned companies or reconstruction of these models reflect on the well-being of our economy?
Reforming the SOE sector could have a material positive impact on the economy. The SOEs currently employ about 600,000 people. They are producing low-quality goods and products, and exhausting scarce government resources by paying salaries and providing subsidies for fuel and other raw materials. They may also have a negative impact on the private sector companies since many of them benefit from contracts with the government to be the sole provider of goods and services to government entities. Hence, many of those companies are draining public finances and resources and stifling employment in the private sector. In addition, studies have shown that SOEs tend to be more polluting to the environment compared to the private sector companies that are more advanced in adopting cleaner technologies. SOEs can be categorized into three types: first, companies that are potentially profitable and, with private sector engagement could be privatized to further grow. Second, companies that are not profitable but potentially could become profitable if reformed and restructured (i.e. by bringing in private-sector management while keeping the government ownership). Third, the companies that are not profitable and non-reformable and likely need to be abolished.
One of the main issues for the Iraqi government to consider is the impact on the employment of SOE reform. Public-sector employees in the SOEs will need to be provided vocational training, rehabilitated, and reintroduced into the workforce. The government needs to decide on whether to continue subsidizing companies that contribute very little to the economy. The cost savings from closing unprofitable and unreformable SOEs could be invested into rehabilitating the educational system in Iraq to match the hundreds of thousands of college graduates annually to the needs of the private sector businesses. The country currently has high rates of low-skilled and unskilled labor and low rates of highly skilled employees with the necessary language skills the private sector needs.
Therefore, the government needs to make a strategic decision regarding the SOE sector in order to help the Iraqi economy. Being an oil-dependent state, every time the oil prices crash, it puts pressure on the government to reform and restructure. When the oil price rises, everybody in the government relaxes as if the problem has gone away. However, the fact is that the problem persists and is aggravated and becomes bigger each year, given the ongoing increase in public sector employment. Many people in the government know this, but there appears to be no political will to execute the necessary reforms.
You have been closely involved with the financial infrastructure and capital markets in Iraq since 2003. How has this changed over the past two decades? What are the main challenges? And how can we move forward?
I believe access to credit is critical for the Iraqi middle-class to re-emerge and for the economy to thrive. Currently, credit does not exist in Iraq—neither bank lending nor private equity—on any significant scale. Only a handful of state-owned and private sector banks provide credit to small and medium enterprises. And they require hefty real estate collateral with only 30% loan to value. The interest rates are quite high–in the low double digits annually for short-term loans. Unfortunately, this fact has not really changed since 2003. Having said that, the Central Bank of Iraq has taken some important steps. They established a fund for industrial projects that is being managed by the Industrial Bank. They also provided loans for SMEs. Iraq has modern banking regulations compared to the rest of the region. The Central Bank initially increased the paid-in capital required to get a banking license. The regulatory bank capital required is one of the highest in the region, which is up to $220 million.
However, the problem remains that most Iraqi banks do not practice proper credit underwriting based on the cash flow analysis of the borrower. Also, given the high-interest rates the government of Iraq pays for borrowing in local currency treasury bills, the private sector banks are happy not to lend to the private sector because they can always just lend to the government, and they are taking pure Iraqi government risk.
I believe this is where financial technology (FinTech) can play a role in providing credit to SMEs. We have seen this elsewhere in many developing markets that have the same lack of credit challenges. These fintech companies–whether nano and microfinance companies employing artificial intelligence and machine learning for credit underwriting or peer-to-peer finance, which is democratizing lending–have bypassed and leapfrogged the traditional types of bank lending.
The other part that can play a major role is the capital markets. The Iraqi Stock Exchange (ISX) has existed for decades. There is still hope that the ISX, along with the regulator, the Iraqi Securities Commission (ISC), would adopt the necessary legislation to facilitate credit to Iraqi companies listed on the ISX. An established Iraqi company should be able to borrow by issuing corporate bonds as well as shares in order to finance its growth.
There were efforts to get international investors to invest in the equity of ISX-listed companies We were all hopeful that the initial public offerings (IPO) of Asiacell, Zain, and others would spur more international investors. There are a handful of international funds that invest in the ISX. However, the volumes and liquidity remain small.
A number of steps need to be taken in order for international portfolio investors to enter Iraq in real volumes. For example, the Iraqi government-owned custodian, the Iraqi Depository Corporation (IDC), had a monopoly for years and refused to open the space for credible and approved private sector custodians. This may have changed recently, but Iraq probably lost at least a decade in attracting capital from international funds. Also, the failure to adopt legislation allowing the issuance of global depositary receipts (GDRs) for Iraqi company shares also contributed to the ISX not realizing its true potential to attract foreign investment. The entrepreneurs and visionaries who are trying to bring about these changes are constantly battling an antiquated and non-transparent system.
A robust capital market is critical for the country's development. The regulatory oversight environment of the ISX and the ISC needs to be continuously updated to develop innovative ways to attract international and regional capital to invest in Iraqi companies. I understand that some forward-thinking Iraqi brokerage firms are actively trying to bring about this needed change.
One of the big attractions for foreign investors used to be the foreign direct investment law, FDI law number 17 (2003), which allowed 100% foreign investment in most sectors except for oil and gas, and real estate. However, the Iraqi parliament, unfortunately, passed legislation limiting foreign ownership to 49%. While the intention of this law may have been good – to protect the Iraqi business person—I believe this was an uninformed decision. The reason is simple: Iraq is not yet Dubai of the 1990s. Iraq still has tremendous challenges in terms of; how foreign investors view the security in the country; the lack of transparency in the system; the unfriendly legal environment and tax regime; the difficulty in setting up a business, and; the lack of availability of credit—to name a few. Therefore, adding another layer of complexity by limiting a foreign investor to owning only 49% of a business is not helpful. I believe that those who pushed for this legislation may not appreciate that Iraq is competing with other neighboring countries for foreign investors. The Middle East region has other competitive investment markets compared to Iraq, such as Saudi Arabia, the UAE, Egypt, and Turkey.
Also, experienced foreign investors would likely have chosen an Iraqi partner who can help them navigate the local landscape. Therefore, I believe putting a cap on foreign ownership was both unproductive and unnecessary.
Still, there are solutions that can be adopted to make Iraq more investable, such as setting up free trade zones. In the UAE, for example, the Dubai International Financial Center (DIFC), Jebel Ali Free Trade Zone (JAFZA), and Abu Dhabi Global Markets (ADGM) are good examples. The free zone is regulated under international best standards, including investment and labor laws. Another solution may be to consider exempting ISX-listed companies from the FDI minority restrictions. This would incentivize more Iraqi companies to list on the ISX as well as foreign investors to invest in those companies.
From your experience in the FinTech sector. How do you evaluate the FinTech opportunities in Iraq?
I have been in traditional corporate and investment banking for two decades and pivoted towards FinTech in the last five years. I serve on the board of two FinTech companies, one in the United Kingdom and one in Germany. I consider myself a reformed investment banker. I believe one of the most exciting opportunities in the Iraqi economy is in the FinTech sector. Iraq has all the ingredients for FinTech to emerge, grow, and thrive. It has a population of over 40 million people, primarily young and technology savvy, with one of the highest internet and mobile phone penetrations in the region. There is a lack of traditional credit, as discussed. This is a fertile environment for FinTech. We are only scratching the surface of FinTech, but we can already see the impact. It started in mobility apps with Careem, where Iraq became one of the largest and fastest-growing markets for ride-hailing apps; Careem later integrated online payments as well as loans to its drivers. We are now also witnessing e-commerce and even social commerce platforms with the likes of Lezzoo, Orisdi, Miswag, and Fedshi. As well as buy now and pay later lending platforms such as ZoodPay.
There still needs to be some regulatory adjustments for FinTech to start growing materially, and a shift in the culture is needed as Iraqis still prefer cash, since there is a lack of trust in the banking system. Electronic payments in Iraq have unfortunately suffered a setback given the recent legal challenges around some payment providers. Also, initial electronic wallet and payments licenses were provided to cellular providers who launched them using a closed as opposed to an open loop system, which unfortunately limited their uses. It is similar to a bank issuing a debit card that their customers can only use to withdraw cash at the same bank's cash machines. These are challenges and opportunities for which Iraqi fintech entrepreneurs need to find solutions.
What motivated you to join the Iraqi Angel Investors Network, and what is your perspective on the investment scene in Iraq? And how can we make Iraq more investable?
I am interested in the startup scene in Iraq and the ambitious entrepreneurs who are leading the change in the ecosystem, and I want to be a part of that exciting movement. I have attended startup pitches since I joined the Iraqi Angel Investors Network. The experience so far has been tremendously enlightening. The Iraqi startup scene could benefit from more hand-holding in helping these startups through incubators, accelerators, and entrepreneurial support organizations. Many Iraqi entrepreneurs have excellent ideas but have not thought through what it means to deploy them into “go to market” business plans and convert them into investment opportunities. We need more support from the international community to provide entrepreneurs with resources, such as KAPITA’s Business Hub.
We also need more seed capital, venture capital, and private equity funds, as well as lending platforms. A handful have been established already. However, the opportunities in the market far outnumber the availability of capital.
I believe the new young and entrepreneurial generation is the only hope for the country. I am inspired by the excitement of a young Iraqi entrepreneur telling her or his story on a particular challenge they see in the market and the solution they have devised for it. I compare that creative positive energy against that of an obstructionist centrally-planning bureaucrat who has been sitting behind his or her desk for 40 years and who holds an archaic if hostile attitude towards the private sector.
I believe that technology can fundamentally change Iraq and the world at large for the better. And I want to play a small part in creating that new world.
View the pdf version of this interview