OIM - Investment Readiness Baseline Study de 2025

INVESTMENT READINESS BASELINE STUDYThe opinions expressed in this publication are those of the authors and do not necessarily reflect the views of the International Organization for Migration (IOM), University of Oxford, University of Cambridge and Imperial College London. The designations employed and the presentation of material throughout the publication do not imply expression of any opinion whatsoever on the part of IOM concerning the legal status of any country, territory, city or area, or of its authorities, or concerning its frontiers or boundaries. IOM is committed to the principle that humane and orderly migration benefits migrants and society. As an intergovernmental organization, IOM acts with its partners in the international community to: assist in meeting the operational challenges of migration; advance understanding of migration issues; encourage social and economic development through migration; and uphold the human dignity and well-being of migrants. This publication was made possible through support provided by KFW. The opinions expressed herein are those of the author and do not necessarily reflect the views of IOM or KFW. This publication was issued without formal editing by IOM. Publisher International Organization for Migration UNAMI Compound (Diwan 2), International Zone, Baghdad/Iraq Email: iomiraq@iom.int Website: https://iraq.iom.int | https://edf.iom.int Cover photo: EDF supported businesses © IOM 2023/Leslye DAVIS and IOM 2025/Aram HAKIM Note: The map on the cover is for illustration purposes only. The boundaries and names shown and the designations used on this map do not imply official endorsement or acceptance by IOM.

Required citation: Amine, R., M. Meki, S. Quinn and J. Smith-Omomo (2025). Investment Readiness Baseline Study. International

Organization for Migration (IOM), Baghdad.

ISBN 978-92-9278-060-9 (PDF)

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© IOM 2025 Some rights reserved. This work is made available under the Creative Commons Attribution-NonCommercial-NoDerivs 3.0 IGO License (CC BY-NC-ND 3.0 IGO). For further specifications please see the Copyright and T erms of Use. This publication should not be used, published or redistributed for purposes primarily intended for or directed towards commercial advantage or monetary compensation, with the exception of educational purposes, e.g. to be included in textbooks.

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PUB2025/046/RINVESTMENT READINESS

BASELINE STUDYiii

CONTENTS

LIST OF FIGURES

IV

LIST OF TABLES

V

LIST OF ACRONYMS

V

EXECUTIVE SUMMARY

1

INTRODUCTION

1

RESEARCH OBJECTIVES

2

RESEARCH HYPOTHESIS

2

LITERATURE REVIEW

2

SAMPLING

3

METHODOLOGY AND SAMPLING

3

RANDOMIZED CONTROLLED TRIAL DESIGN

4

PROGRESS TO DATE

5

BASELINE DATA

5

SOCIOECONOMIC CHARACTERISTICS OF BUSINESS OWNERS

5

BUSINESS OVERVIEW

6

FINANCIAL INSIGHTS

7

EMPLOYMENT CHARACTERISTICS

11

TRENDS IN SALES AND PROFITABILITY

12

DEMOGRAPHIC CORRELATES WITH FINANCIAL ACCESS

15

FIRM-LEVEL CORRELATES WITH FINANCIAL ACCESS

16

TRUST AND CONFIDENCE IN FINANCIAL INSTITUTIONS

21

SAVINGS BEHAVIOUR

22

SUBGROUP ANALYSIS BY GENDER AND MIGRATION STATUS

22

ACCESS TO BANK ACCOUNT AND LOANS

22

SELF-REPORTED MANAGEMENT PRACTICES BY GENDER AND MIGRATION STATUS

23

TRUST IN FINANCIAL SYSTEM

25

CONCLUSION

26

POLICY RECOMMENDATIONS

27

REFERENCES

29iv Figure 1. Randomized Controlled Trial Design 4 Figure 2. Household expenditure per category (monthly averages in USD) 5

23

TRUST IN FINANCIAL SYSTEM

25

CONCLUSION

26

POLICY RECOMMENDATIONS

27

REFERENCES

29iv Figure 1. Randomized Controlled Trial Design 4 Figure 2. Household expenditure per category (monthly averages in USD) 5 Figure 3. Percentage distribution by migration status and gender 6 Figure 4. Distribution of firm owners by governorate 6 Figure 5. Distribution of firm owners by age group 6 Figure 6. Main sources of project financing 8 Figure 7a. Employment composition by sex 11 Figure 7b. Employment composition by gender and type 11 Figure 8. Gender of employees by sex of owner 11 Figure 9. Family vs. non-family employment composition 12 Figure 10. Sales and profits trends over time 12 Figure 11. Demographic correlates with profits 14 Figure 12. Firm correlates with profits 15 Figure 13a. Demographic correlates with having a bank account 16 Figure 13b. Firm correlates with having a bank account 17 Figure 14a. Demographic correlates with debt financing 18 Figure 14b. Firm correlates with debt financing 19 Figure 15a. Demographic correlates with total loan amount 20 Figure 15b. Firm correlates with having a total loan amount 21 Figure 16. Confidence in financial institutions 21 Figure 17. Reasons for low confidence in financial institutions 22 Figure 18. Main reasons for saving difficulties 22 Figure 19. Access to borrowing indicators by sex and migration status 23 Figure 20. Trust in financial institutions by sex and migration status 24 Figure 21. Trust in financial institutions by sex and migration status 25 LIST OF FIGURESv Table 1. RCT sample to date 5 Table 2. Summary statistics 6 Table 3. Business financing overview (USD) 7 Table 4: Business financing overview 8 Table 5: Business management practices 9 Table 6a. Correlates to loan borrowers (regression) 9

5 Table 2. Summary statistics 6 Table 3. Business financing overview (USD) 7 Table 4: Business financing overview 8 Table 5: Business management practices 9 Table 6a. Correlates to loan borrowers (regression) 9 Table 6b. Correlates to loan borrowers 10 Table 7a. Correlates to business profits (regression) 12 Table 7b. Correlates to business profits 13

LIST OF TABLES

LIST OF ACRONYMS

Enterprise Development Fund EDF International Finance Corporation IFC International Labour Organization ILO International Organization for Migration IOM Internally Displaced Person IDP Iraqi Dinar IQD Randomized Controlled Trial RCT Small and Medium-sized Enterprise SME United States Dollar USD1 BASELINE REPORT 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

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’ financing 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 financial 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

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 financial inclusion, gender equity and economic resilience for SMEs in Iraq. INTRODUCTION This research project seeks to address the financing constraints faced by small and medium-sized enterprises (SMEs) in Iraq, particularly in a post-conflict environment. SMEs constitute the majority of firms in Iraq, contributing significantly to private-sector employment. Approximately 61.6 per cent of the employed population work in the private sector, while SMEs account for 80 per cent of the private sector. Hence, SMEs contribute to about half of Iraq’s employment (ILO, 2021). Despite their critical role, SMEs remain underdeveloped due to various constraints, particularly financial and knowledge gaps. The project will use an RCT to evaluate the impact of capital grants worth an average of USD 17,000 each, financial training and blended finance on firm growth and labour outcomes. The study targets SMEs aiming to expand their

underdeveloped due to various constraints, particularly financial and knowledge gaps. The project will use an RCT to evaluate the impact of capital grants worth an average of USD 17,000 each, financial training and blended finance on firm growth and labour outcomes. The study targets SMEs aiming to expand their operations, with a particular focus on businesses led by displaced populations, returnees and host communities. This report presents baseline findings from an ongoing study examining financial constraints SMEs in Iraq face. As a post-conflict economy, Iraq’s private sector plays a crucial role in economic recovery, yet businesses struggle with financing gaps that hinder their growth and sustainability. The baseline survey, conducted with 518 firms, establishes the pre-intervention conditions of SMEs before the implementation of financial grants, training and blended finance programmes. This initial analysis is crucial for understanding SME characteristics, assessing financial barriers, exploring demographic disparities and informing policy interventions. The study provides insights into firm size, employment patterns and financial access to identify key constraints. It evaluates firms’ reliance on self-financing and their limited access to formal credit institutions. It also highlights differences in financial inclusion based on gender, displacement status and regional factors. These findings will guide policymakers in refining support mechanisms to maximize the effectiveness of capital grants, financial training and blended finance in fostering sustainable economic growth in Iraq’s SME sector. The study’s design ensures that findings from follow-up evaluations will isolate the causal impact of different financial interventions on SME performance, enabling evidence-based policy decisions.2 INVESTMENT READINESS BASELINE STUDY RESEARCH OBJECTIVES This research aims to understand how financial interventions (grants and training) can support SMEs in Iraq. Specifically, the study examines whether providing grants to partially finance SMEs’ ambitious expansion plans can lead to meaningful growth, particularly when accounting for the displacement status of the business owners. It also explores the effectiveness of external finance training in helping SMEs secure the additional capital needed to overcome financing gaps, while assessing how the impacts of such training differ among returnees, IDPs and host community members. A key component of the study investigates whether a blended finance

displacement status of the business owners. It also explores the effectiveness of external finance training in helping SMEs secure the additional capital needed to overcome financing gaps, while assessing how the impacts of such training differ among returnees, IDPs and host community members. A key component of the study investigates whether a blended finance approach – where grants are paired with a requirement for higher co-financing contributions from business owners – leads to better outcomes in achieving firm expansion goals, and whether the effectiveness of this approach varies based on the displacement status of the business owner. Finally, the research seeks to identify the mechanisms through which grants affect capital, labour and firm processes, while analysing how these mechanisms differ across returnee, IDP and host community businesses. The study provides critical insights into the design of financial support programmes that can foster SME growth, create employment opportunities and contribute to sustainable economic resilience in post-conflict contexts. RESEARCH HYPOTHESIS This study’s core hypothesis is that SMEs in Iraq, particularly in a post-conflict context, face substantial financial barriers that hinder their growth and sustainability. The “big financial push” suggests that larger financial interventions, rather than incremental microloans or small grants, are necessary to spur meaningful expansion. This hypothesis is supported by the observation that small-scale interventions, such as microgrants, often fail to create sustained business growth or job creation due to limited capital that does not address the structural constraints faced by SMEs. Larger financial injections allow firms to invest in higher-return activities, such as upgrading technology, expanding operations or hiring skilled labour, which are critical for scaling up. Studies such as McKenzie (2017) on business plan competitions in Nigeria and De Mel et al. (2019) on capital injections for SMEs show that larger grants lead to significant improvements in profitability, employment and firm sustainability. Furthermore, in post-conflict settings like Iraq, SMEs often face compounded challenges, including damaged infrastructure, reduced market access and limited trust in financial institutions, which require more substantial support to overcome effectively. A key element of this study is testing whether requiring business owners

employment and firm sustainability. Furthermore, in post-conflict settings like Iraq, SMEs often face compounded challenges, including damaged infrastructure, reduced market access and limited trust in financial institutions, which require more substantial support to overcome effectively. A key element of this study is testing whether requiring business owners to contribute a certain threshold relative to the grant some of their own money (referred to as “skin in the game”) alongside the grant leads to better business outcomes. By comparing businesses that receive grants with and without co-funding requirements, the research aims to provide policymakers with insights into how best to structure financial support programmes. The goal is to understand whether requiring business owners to invest their own money improves the sustainability and effectiveness of these grants. This “big financial push” that refers to the EDF grants targets small firms with detailed expansion plans that have been vetted through IOM’s rigorous multistage selection process. The process begins with an orientation and screening stage, where general eligibility is assessed. Firms that pass this stage move to the expression of interest, where the latter are then assessed with mostly quantitative criteria, resulting in a 66 per cent rejection rate. Next, firms undergo a verification visit, where the validity of their information is critically assessed, leading to a 75 per cent rejection rate. At the application stage, firms submit detailed plans for quantitative evaluation, with all applicants proceeding beyond this point. The investment committee visit follows, where trained committee members conduct a qualitative evaluation of firms’ proposed expansion plans, leading to a 48 per cent rejection rate. The final stage, negotiation, involves finalizing terms with firms, with less than 5 per cent facing rejection or self-electing out of the grant. By providing significant capital to businesses that pass this rigorous selection process, IOM ensures that only firms with strong potential for growth and job creation are supported. These findings will help inform future efforts to foster long-term growth, job creation and resilience in post-conflict economies. LITERATURE REVIEW A critical knowledge gap in the literature is how SMEs can contribute to postconflict economic recovery and the reintegration of displaced populations.

findings will help inform future efforts to foster long-term growth, job creation and resilience in post-conflict economies. LITERATURE REVIEW A critical knowledge gap in the literature is how SMEs can contribute to postconflict economic recovery and the reintegration of displaced populations. In Iraq, SMEs form a significant part of the private sector but face persistent challenges in accessing formal financial resources, which limit their potential to grow, hire and contribute to economic stabilization (World Bank, 2022). Our baseline study confirmed that access to finance remains a key constraint for SMEs in Iraq (IOM, 2023b). This project explores the relative importance of grants, financial training and external finance in addressing these constraints and supporting firm growth and employment generation. A vast body of microfinance research documents that typical small-scale microcredit loans have shown minimal impact on business performance and employment creation. Studies such as the work by De Mel et al. (2019) suggest that while microfinance tends to have limited average effects on generating longterm employment, significant heterogeneity exists. In particular, bigger firms may experience higher returns. The EDF programme, however, adopts a “big-push” approach, offering substantial grants tied to job creation, which has shown promising results in administrative data. This project will rigorously evaluate the impacts of such large-scale interventions, focusing on how significant capital injections and accompanying financial training can spur sustainable firm growth3 BASELINE REPORT and employment in a post-conflict setting. McKenzie (2017) finds that a largescale business plan competition in Nigeria, which awarded substantial grants to winners, led to significant increases in firm creation, survival, profitability and employment, including a notable rise in the likelihood of firms growing to 10 or more employees. Furthermore, policy reports by IOM and the International Finance Corporation (IFC) underscore the importance of tailored financial solutions for SMEs. IOM highlights that Iraqi SMEs face numerous barriers to accessing formal finance, including complex loan requirements, high collateral demands and religious concerns about interest-bearing loans. As a result, many SMEs rely on informal

(IFC) underscore the importance of tailored financial solutions for SMEs. IOM highlights that Iraqi SMEs face numerous barriers to accessing formal finance, including complex loan requirements, high collateral demands and religious concerns about interest-bearing loans. As a result, many SMEs rely on informal lending from family and friends, which is insufficient to meet their long-term business needs (IOM, 2023a). An IFC report complements these findings by showing that the formal financial sector remains largely inaccessible to SMEs, with only 9 per cent of lending reaching the sector (IFC, 2022). Regulatory gaps, high interest rates and weak banking infrastructure exacerbate these challenges. This research contributes to the sparse literature on blended finance by exploring how large grants can potentially attract external finance to support SME growth, as evidenced in a recent study in Pakistan (Bari et al., 2024) as well as McKenzie (2017). We also aim to contribute to the emerging literature on investment readiness programmes, which prepare small firms for scalable growth (Cusolito et al., 2021). By addressing both the supplyand demand-side barriers to finance, this project has the potential to provide unique insights into the role of SMEs in post-conflict recovery, with a particular focus on fostering sustainable growth and meaningful employment outcomes. SAMPLING METHODOLOGY AND SAMPLING This study focuses on 518 firms that applied to the EDF programme and met basic eligibility criteria. Importantly, this sample is not representative of all Iraqi SMEs, or even of all businesses in target governorates. Rather, it provides insights into firms that have shown interest in expanding operations, have viable business plans and meet specific selection criteria. The EDF programme follows a rigorous multistage selection process to ensure grants are allocated to firms with strong potential for growth, job creation and economic recovery. The process begins with basic eligibility screening (3–30 employees, operational prior to 2019, Iraqi ownership), followed by a systematic evaluation through the following stages:

1. Orientation and screening: General eligibility is assessed based on business

grants are allocated to firms with strong potential for growth, job creation and economic recovery. The process begins with basic eligibility screening (3–30 employees, operational prior to 2019, Iraqi ownership), followed by a systematic evaluation through the following stages:

1. Orientation and screening: General eligibility is assessed based on business size, years of operation and ownership status.

2. Expression of interest (EoI): Businesses submit initial applications that are assessed using mostly quantitative criteria, resulting in approximately 66 per cent of applications being rejected at this stage.

3. Verification visit: Field staff conduct on-site verification of information provided in the EoI, which leads to a 75 per cent rejection rate as businesses are evaluated on actual operations, employee conditions and feasibility of expansion plans.

4. Application stage: Shortlisted businesses submit detailed expansion plans including marketing strategies, financial projections and labour plans along with supporting documentation such as supplier certificates, quotations for future purchases and registration documents.

5. Investment committee visit: Senior IOM staff conduct qualitative evaluations of proposed expansion plans, assessing business viability and sustainability, which leads to a 48 per cent rejection rate.

6. Negotiation: Final terms are established with approved businesses, with less than 5 per cent facing rejection or self-selecting out of the programme at this stage.

The selection criteria emphasize both financial viability and social impact. For instance, firms are evaluated on their ability to create sustainable employment relative to the grant amount requested, with benchmarks typically set at one additional staff member per USD 3,200–3,700 granted, depending on the donor. Additional weight is given to businesses that demonstrate solvency, with scores adjusted based on outstanding debts relative to current profits. Furthermore, community stabilization is prioritized through additional points for businesses owned by women or those that employ IDPs and returnees. This systematic approach ensures that the 518 businesses in our sample represent firms with strong potential for growth and job creation, despite not being statistically representative of the broader Iraqi SME landscape. When interpreting the results throughout this report, readers should consider these selection characteristics.

This systematic approach ensures that the 518 businesses in our sample represent firms with strong potential for growth and job creation, despite not being statistically representative of the broader Iraqi SME landscape. When interpreting the results throughout this report, readers should consider these selection characteristics. In terms of analysis, the report presents several coefficient plots to illustrate relationships between business characteristics and outcomes such as profitability and access to finance. These plots display regression coefficients (shown as dots) with their associated confidence intervals (horizontal lines extending from each dot).

When interpreting these plots: • The position of the dot relative to zero indicates the direction and magnitude of the relationship. Dots to the right of zero suggest a positive association, while dots to the left suggest a negative association. • The length of the horizontal line represents the 95 per cent confidence interval. Shorter lines indicate more precise estimates. • When a confidence interval crosses the zero line, it suggests the relationship is not statistically significant at the 95 per cent confidence interval level. • Variables with confidence intervals entirely above or below zero show statistically significant relationships with the outcome.

These plots help visualize which factors have stronger associations with outcomes like business profitability or access to finance, while controlling for other variables in the model. However, readers should note these relationships represent correlations rather than causal effects.4

INVESTMENT READINESS BASELINE STUDY

RANDOMIZED CONTROLLED TRIAL DESIGN

Figure 1. Randomized Controlled Trial Design Sample = ICV-Approved firms EDF EDF + IR EDF + IR + 50% contribution IR Pure control The first treatment arm is a “Grant’; firms receive a financial grant called the EDF. This grant is designed to provide immediate financial support, allowing firms to invest in necessary resources, expand operations or cover other critical expenses. The hypothesis is that this direct financial injection will improve firm performance. The EDF programme follows a rigorous multistage selection process to ensure grants are allocated to firms with strong potential for growth, job creation and economic recovery. To be eligible, firms must have between three and

expenses. The hypothesis is that this direct financial injection will improve firm performance. The EDF programme follows a rigorous multistage selection process to ensure grants are allocated to firms with strong potential for growth, job creation and economic recovery. To be eligible, firms must have between three and 30 employees (except if women-led), be operational prior to 2 019 and be owned and managed by Iraqi nationals. These basic eligibility criteria form the foundation for the selection process, which progresses through several stages, including pre-screening, verification visits and qualitative assessments by an investment committee. The selection criteria emphasize both the financial stability of businesses and their potential social impact. For instance, firms are evaluated on their ability to add staff relative to the size of the grant requested, with benchmarks set at one addi