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EXECUTIVE SUMMARY
Small and medium-sized enterprises (SMEs) form the backbone of Iraq’s private sector, employing approximately half of Iraq’s employment. However, access to finance remains a critical barrier to growth, particularly in a post-conflict environment. This study uses a baseline survey of 518 firms – with seven workers on average, 46.2 per cent of whom are women – participating in the Enterprise Development Fund (EDF) programme as well as access to finance trainings to analyse financial constraints and inform policy interventions. Iraq has over 1 million SMEs that constitute about two thirds of the country’s private sector. However, the baseline data show that 52 per cent of firms lack formal registration, limiting their access to financial services and government support. Tax registration remains low, with only 32 per cent of firms registered, highlighting informality as a major barrier to business growth. To address these formalization challenges, we recommend implementing streamlined one-stop registration processes, creating graduated formalization incentives tied to grants and credit access, and establishing business service centres in underserved regions.
Financial access remains a challenge, with only 30 per cent of women and 20 per cent of men owning a bank account, illustrating significant financial exclusion. While 58% of firms report using self-financing—allocating an average of 39.6% of their financing mix to it—only 15% of firms have accessed any debt financing. Among those, debt represents an average of 6.5% of firms’ f inancing structure. These findings underscore the need to develop SME-specific lending products with reduced collateral requirements, establish tiered financing schemes matching business growth stages, and strengthen sharia-compliant f inancial instruments. Loan access varies significantly across demographic groups, with returnees receiving the highest average loan amount of 13,617 United States dollars (USD), compared to USD 7,366 for host community members and USD 3,420 for internally displaced persons (IDPs). This suggests a need for specialized financial products for IDPs and targeted financial literacy training for returnees who, despite receiving larger loans, demonstrate weaker financial management practices. Gender disparities are also evident, as women receive significantly smaller loans, averaging USD 4,396 compared to USD 14,933 for men, despite showing stronger financial management practices. These disparities call for expanding the EDF-Women initiative with increased capital allocations, establishing gender-responsive financing with simplified application processes, and creating mentorship networks for female entrepreneurs.
Confidence in financial institutions is low, with only 3.1 out of 5 firms trusting public commercial banks, and even lower trust in private Islamic banks at 2.4 out of 5, with 24.9 per cent of respondents fearing loss of savings. To rebuild trust, we recommend improving awareness of deposit insurance frameworks, simplifying banking procedures, creating authentication systems for Islamic institutions, and launching educational campaigns on banking services. Additionally, firms face significant barriers to savings, with 42 per cent citing insufficient income and 25.9 per cent reporting irregular cash flows, which limits their financial resilience. Creating flexible savings products tailored to irregular business cash flows, establishing matched savings programs, and developing community-based savings associations could help address these challenges.
The research is part of a randomized controlled trial (RCT) to evaluate the impact of three key interventions: grants, financial training and blended finance. Firms will receive an average of USD 17,000 in capital grants, while financial training will equip businesses with financial management skills to improve credit access. The blended finance model requires firms to co-finance at least 50 per cent of the grant amount, testing the effect of “skin in the game.” Operational inefficiencies are also evident, as profits do not increase proportionally with sales, suggesting a need for targeted technical assistance in financial planning and cost control, as well as sector-specific efficiency benchmarking tools. By analysing baseline conditions and implementing these targeted recommendations, this study aims to inform policies that enhance f inancial inclusion, gender equity and economic resilience for SMEs in Iraq.