How Armed Conflict Affects Financial Systems
Introduction
When armed conflict erupts — as the US-Iran military escalation over the Strait of Hormuz did in July 2026 — the financial system is rarely an afterthought. It is often the first transmission belt through which economic pain spreads. Banking systems face runs or liquidity freezes. Payment rails can be severed by sanctions or infrastructure damage. Remittance corridors — lifelines for millions of families — narrow or close. Stock markets plunge on uncertainty.
This article explains the mechanisms through which armed conflict affects financial systems, using the Gulf crisis as a running case study alongside historical patterns.
Banking stability under fire
A banking system’s ability to withstand conflict depends on three factors: capital adequacy, nonperforming loan exposure, and the central bank’s capacity to provide liquidity.
Capital adequacy ratios measure a bank’s capital as a percentage of its risk-weighted assets. Higher ratios mean thicker cushions against losses. During the 2026 Gulf crisis, the region’s banks show wide variation:
- Saudi Arabia (13.7%, 10th globally) — well-capitalized, with room to absorb moderate shocks.
- Iraq (11.8%, 28th globally) — adequate on paper, but with 14.7% nonperforming loans (134th of 144), the worst loan quality among Gulf states.
- Türkiye (7.2%, 101st globally) — below the global median, with existing currency and inflation pressures that conflict intensifies.
Nonperforming loans (NPLs) spike during conflicts as businesses fail, supply chains break, and borrowers default. Iraq’s 14.7% NPL ratio is a red flag — a shock to the economy could push it much higher. Compare this to South Korea (0.2%, 1st globally) or the United States (0.8%, 9th globally), where loan books are much cleaner.
For more on bank capital adequacy, see our explainer on what bank capital adequacy ratios mean.
Payment systems and financial inclusion in conflict zones
Armed conflict disrupts payment systems in at least three ways:
1. Physical infrastructure damage. Bank branches, ATMs, and mobile network towers can be damaged or destroyed. Countries with low digital payment adoption are most vulnerable because they lack fallback options. In Iraq, only 30.2% of adults have an account, and just 25% use digital payments. Mobile money penetration stands at 11.9% — the 66th lowest globally. When bank branches close, most Iraqis have no payment alternative.
2. Liquidity freezes and capital controls. During conflicts, governments often impose capital controls to prevent capital flight. These can freeze remittance outflows from Gulf states to India, Pakistan, and other South Asian countries that depend on worker remittances.
3. Digital resilience. Countries with high digital payment adoption — like the UAE (76.6%) and Saudi Arabia (75.7%) — are better positioned to maintain payment flows during physical disruption. Mobile money has proven especially valuable during crises. See our article on how mobile money helps during natural disasters.
Remittance corridors — the family lifeline under threat
Remittances are among the most conflict-sensitive financial flows. During the Gulf crisis, several of the world’s largest remittance corridors face disruption:
| Recipient Country | Annual Inflows | Primary Source Countries |
|---|---|---|
| India | $137.7 billion | UAE, Saudi Arabia, Kuwait |
| Pakistan | $34.9 billion | Saudi Arabia, UAE |
| Jordan | $4.4 billion | Gulf states |
India receives more remittances than any other country — $137.7 billion in 2024 — and a substantial portion originates in Gulf states. A prolonged conflict that reduces employment of migrant workers or imposes capital controls would hit these flows directly. For more, see where remittances matter most.
Conflict can impact remittance corridors through:
- Employment shocks — migrant workers lose jobs or are evacuated.
- Exchange rate volatility — currencies of conflict-affected countries may depreciate, reducing the local-currency value of remittances.
- Formal channel disruption — banks may suspend services to sanctioned or conflict-adjacent countries.
Stock markets as conflict barometers
Stock markets react instantly to geopolitical shocks. Gulf stock markets, heavily concentrated in oil and finance, are particularly exposed:
| Country | Stock Market Cap | Sector Concentration |
|---|---|---|
| Saudi Arabia | $2.4 trillion | Oil (Aramco ~60%) |
| UAE | $1.1 trillion | Real estate, finance, logistics |
| Qatar | $176.9 billion | Energy, petrochemicals |
| Kuwait | $172.1 billion | Energy, finance |
Saudi Arabia’s $2.4 trillion market — the 11th largest globally — has Aramco as its dominant component. A Hormuz closure that physically prevents oil exports directly threatens Aramco’s revenue, which cascades through the entire Saudi market. For context on what drives stock market capitalization, see how stock market capitalization reflects economic depth.
Why conflict differs from sanctions
Sanctions — the subject of our article on what sanctions mean for financial access — are a policy tool designed to pressure specific countries while minimizing collateral damage to global markets. Active military conflict is fundamentally different:
- Speed of impact — sanctions phase in over months or years; military strikes affect markets in hours.
- Physical destruction — sanctions freeze assets; conflict can destroy physical financial infrastructure.
- Uncertainty premium — conflict timelines are unpredictable, creating a larger risk premium in asset prices.
- Human displacement — conflict creates refugee and migrant worker displacement that disrupts remittance corridors for years.
Three limitations of the data
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Survey data lags reality. The latest Global Findex data is from 2021 or 2024, predating the 2026 conflict. Current account ownership in Iraq and other conflict zones may differ substantially from the most recent survey.
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National averages hide local devastation. A national bank capital adequacy ratio of 11.8% (Iraq) doesn’t capture the situation of individual banks in conflict-affected regions.
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No projections for conflict scenarios. Financial inclusion data has no projections — survey-based metrics like account ownership cannot be extrapolated. Only a few WDI series (stock market cap, mobile subscriptions) have capped-CAGR projections, which assume normal conditions, not wartime.
What 2026 looks like
The 2026 Gulf crisis demonstrates that financial system resilience during conflict depends on two variables largely outside individual countries’ control: the geographic proximity to fighting and the share of income from Hormuz-dependent oil exports. Gulf states with strong bank capital cushions (Saudi Arabia 13.7%) and high digital payment adoption (UAE 76.6%) are better positioned than neighbors with fragile banking sectors and low financial inclusion (Iraq, 30.2% account ownership). For South Asian remittance-dependent economies, the risk is indirect but severe: a contraction in Gulf employment means less money flowing home through formal and informal channels.
For a complete explanation of how we compile and present financial data, see our methodology page.
Sources & method
This article draws on data from the World Bank’s World Development Indicators (stock market capitalization, remittance inflows), the IMF’s Financial Access Survey (bank capital adequacy, nonperforming loans), and the World Bank Global Findex database (account ownership, digital payment adoption, mobile money). Each dataset uses its most recent year available. Stock market cap data is in current US dollars. Remittance and banking figures are as reported by national authorities to international organizations. For full methodological details, visit our methodology page.