Building Inclusive Financial Systems: Lessons from the MENA Region

Building Inclusive Financial Systems: Lessons from the MENA Region

Across the previous instalments of this series, we traced a single thread running through anti-money laundering (AML), counter-terrorism financing (CTF), Know Your Customer (KYC), economic sanctions, the correspondent banking crisis, central bank digital currencies (CBDCs), cryptocurrency regulation, financial intelligence units (FIUs), trade-based money laundering (TBML), and the RegTech revolution. In this concluding piece, we try to weave these separate strands into one fabric and ask the central question: how can a country like Iraq build a more inclusive financial system without losing its ability to fight financial crime? Achieving genuine financial inclusion in Iraq is not a technical luxury — it is a precondition for long-term economic stability, especially in a country where a large share of citizens still sits outside the formal banking sector.

Lesson One: Compliance and Inclusion Are Two Sides of the Same Coin

Anti-money laundering and counter-terrorism financing rules have long been viewed as a regulatory burden weighing on small, low-resource banks, while financial inclusion is treated as a separate development goal. But the MENA experience shows the two are deeply intertwined. When the Financial Action Task Force (FATF) imposes strict standards on a country without accounting for its institutional reality, the most common outcome is not better compliance but the exclusion of large population segments into the informal sector, where there is neither oversight nor protection. Lebanon, for example, saw a mass migration of savings out of the banking system into cash transactions and informal hawala networks after its 2019 banking crisis, which simultaneously weakened the state’s ability to track financial flows and eroded citizens’ trust in banks. The lesson is clear: regulation that ignores inclusion creates larger grey zones than the ones it closes.

Lesson Two: Digital KYC as a Gateway to Inclusion, Not Exclusion

Digital identity and remote-verification (eKYC) projects adopted by countries such as the UAE and Jordan have shown that identity verification can be a tool of expansion rather than exclusion, when designed intelligently. Instead of requiring a fixed residential address or a prior credit history — which automatically excludes millions of internally displaced people, refugees, and informal-sector workers — these systems rely on tiered KYC: a minimal-requirement account for opening a small wallet, with limits rising as verification is completed. For Iraq, where a large share of the population still lacks up-to-date official documentation after decades of conflict, a tiered KYC model is the most suitable way to start bringing internally displaced people, returnees, and residents of border regions into the formal financial system without abandoning core AML standards.

Lesson Three: Sanctions and Their Unintended Cost to Ordinary Citizens

The experience of Iraq, Iran, and Syria has shown that sanctions regimes, whatever their legitimate political goals, carry a heavy side cost: the withdrawal of major international banks from local markets for fear of legal risk (de-risking), the shrinking of formal transfer channels, and rising reliance on hawala and exchange networks that lack adequate oversight. This “defensive banking contraction” hits small importers, charities, and families dependent on diaspora remittances disproportionately hard. The lesson for Iraq specifically is that any regulatory reform must balance compliance with international sanctions standards against protecting legitimate channels for Iraqi diaspora remittances, by strengthening transparency rather than withdrawing entirely from customer groups deemed theoretically high-risk.

Lesson Four: The Correspondent Banking Crisis Threatens Regional Financial Integration

The withdrawal of major correspondent banks from small and mid-sized regional banks in Iraq, Lebanon, Yemen, and parts of North Africa was not a decision aimed at any single country, but the result of a cost-benefit calculation: the profit margin from serving a small bank in an emerging market no longer justified the compliance risk and potential fines. The result is growing banking isolation of entire countries from the international dollar payment network. This is precisely where investment in regional payment infrastructure — such as Gulf clearing systems or intra-Arab payment initiatives — becomes a strategic priority rather than a mere technical project, because it reduces total dependence on traditional US and European correspondent relationships.

Lesson Five: Central Bank Digital Currencies Between Sovereignty and Oversight

The region’s experiments with sovereign digital currencies — such as the UAE’s “Digital Dirham” project and early exploration initiatives in other Gulf states — show that a CBDC can be an effective financial-inclusion tool if it is designed to serve the unbanked directly, not merely as interbank settlement infrastructure. For a central bank such as the Central Bank of Iraq, which seeks to manage the exchange rate and reduce reliance on paper cash, gradually exploring a national digital currency linked to existing payment platforms and mobile wallets could be an important step within a broader path of financial-sector reform, provided it is preceded by sufficient investment in financial and digital literacy.

Lesson Six: Cryptocurrency Regulation Between Prohibition and Embrace

Approaches across the region toward cryptocurrency have ranged from near-total prohibition to deliberate regulatory embrace. The UAE, through frameworks such as Dubai’s VARA, chose conditional embrace: clear licensing, capital requirements, and strict AML standards for trading platforms. This model has attracted investment and jobs, but it requires high institutional supervisory capacity. Other countries chose outright prohibition, which pushed activity into the shadows without actually eliminating it. For Iraq, where informal cryptocurrency trading is widespread despite restrictions, gradual, structured recognition — registering trading platforms, imposing KYC rules on them, and linking them to the financial intelligence unit — is more productive than a prohibition that is difficult to enforce and denies the state both oversight and potential tax revenue.

Lesson Seven: Financial Intelligence Units Need Independence and Data

The effectiveness of any country’s financial intelligence unit (FIU) rests on three elements: its institutional independence from political pressure, the quality of data reaching it from banks and exchange companies, and its analytical capacity to link suspicious patterns across multiple sectors. In Iraq, where a large share of transfers still moves through non-bank channels, expanding mandatory reporting to cover major exchange companies and digital payment platforms, alongside upgrading the technical systems of the anti-money-laundering office, is an urgent priority for strengthening the state’s ability to detect complex money-laundering and terrorism-financing patterns.

Lesson Eight: Trade-Based Money Laundering Remains the Weakest Link

Among all money-laundering methods, manipulating trade invoices — over- or under-pricing imported and exported goods — remains the hardest to detect, because it hides behind transactions that appear legitimate on their face. In an import-dependent economy such as Iraq’s, strengthening cooperation between customs authorities, the central bank, and the financial intelligence unit, through a unified data-sharing platform for foreign trade invoices, could meaningfully close this gap. Likewise, comparing declared invoice prices against global market prices using automated data-analysis tools provides an effective first line of defence at relatively reasonable cost.

Lesson Nine: RegTech Offers Developing Countries a Shortcut

Perhaps the single most practical lesson from this series is that regulatory technology (RegTech) allows developing countries to “leapfrog” costly development stages that traditional systems once required. Automated sanctions-list screening tools, AI-driven transaction analysis for detecting suspicious patterns, and shareable digital KYC platforms are all available today at a fraction of the cost they carried a decade ago. But benefiting from them requires regulatory will and basic digital infrastructure — a trusted national digital identity, internet connectivity, and legal frameworks for data protection — and this should sit at the top of any plan for Iraqi banking sector reform in the years ahead.

The Shape of MENA Financial Regulation: Toward a Balanced Model

Drawing these lessons together, a balanced regulatory model for the region can be summarised in three principles. First, gradualism rather than outright prohibition or full liberalisation, through flexible regulatory frameworks that can be adjusted as the market evolves. Second, investment in shared digital infrastructure — digital identity, data-exchange platforms, automated financial intelligence units — as the foundation for any subsequent reform, rather than imposing new rules on old infrastructure. Third, involving the private sector, civil society, and banks in drafting regulations rather than imposing them purely from above, because regulation that ignores market realities often opens new spaces for violation rather than closing them.

Specific Recommendations for Iraq

Building on everything above, a set of practical recommendations can be drafted for Iraqi policymakers:

• Adopt a tiered KYC model: allow digital accounts and wallets with minimal requirements for small savers and displaced people, raising verification levels gradually as transaction volumes grow.
• Modernise the technical infrastructure of the anti-money-laundering office and the financial intelligence unit: link it electronically with banks, major exchange companies, and payment platforms to improve the speed and accuracy of suspicious-transaction reporting.
• Regulate cryptocurrency trading platforms gradually rather than relying on ineffective prohibition, through licences conditioned on AML and KYC standards, giving the state better oversight and possibly new tax revenue.
• Strengthen customs-banking cooperation to combat trade-invoice manipulation, through a unified data platform comparing invoice values against global market prices.
• Protect legitimate transfer channels for Iraqi diaspora remittances from defensive banking contraction, through structured dialogue with international correspondent banks and greater transparency instead of full relationship termination.
• Gradually explore a central bank digital currency linked to mobile wallets, in parallel with financial and digital literacy campaigns across the provinces.
• Involve banks and fintech startups in drafting regulations, through periodic consultation mechanisms and regulatory sandboxes that allow new financial products to be tested under direct supervision before full market launch.

Conclusion

There is no single regulatory model that fits every country in the MENA region — each has its own institutional history, economic reality, and demographic structure. But the common thread running through every experience reviewed in this series is that financial security and financial inclusion are not competing goals; they are two faces of a single healthy financial system. For Iraq, the opportunity exists today to build a financial system that is both more inclusive and more secure, by adopting smart, tiered regulatory tools suited to the country’s realities after decades of conflict and sanctions, rather than importing ready-made models from radically different markets. This path requires patience and long-term institutional investment, but it is the only path that combines financial stability with a wider circle of beneficiaries from the formal economy.

Frequently Asked Questions

What is the difference between financial inclusion and regulatory compliance, and do they conflict?

Financial inclusion means expanding citizens’ access to formal banking and financial services, while regulatory compliance means adhering to AML, CTF, and sanctions standards. The two goals do not necessarily conflict; the challenge is designing tiered regulatory frameworks — such as tiered KYC models — that achieve compliance without excluding low-income or under-documented groups.

Why are international correspondent banks withdrawing from working with Iraqi banks?

This is mainly due to “de-risking,” where large banks judge that the return from serving small or theoretically high-risk markets no longer justifies the compliance cost and potential legal risk associated with sanctions and AML rules, leading them to prefer full withdrawal over managing risk on a case-by-case basis.

Is regulating cryptocurrency in Iraq practically possible given widespread informal trading?

Yes, through a gradual approach that begins by registering local exchange and trading platforms and linking them to AML and KYC requirements, rather than attempting to ban activity that is difficult to actually track. This approach gives the state progressively better oversight instead of leaving the market entirely outside the formal framework.

What role can a central bank digital currency play in financial inclusion in Iraq specifically?

A sovereign digital currency linked to mobile wallets could reach populations without traditional bank accounts, especially in rural and border regions, provided it is matched by parallel investment in digital infrastructure and financial literacy, and designed carefully to avoid any risk to the stability of the traditional banking sector.