BAGHDAD, June 8 (Reuters) - Iraq plans to set up a deposit guarantee fund to encourage Iraqis to use banking services and to develop the financial industry, the central bank said.

An estimated 30 trillion dinars ($25.71 billion) in cash are held outside the Iraqi banking system, according to a central bank statement received on Wednesday. About 10 trillion dinars only are kept in the banking system.

Iraq has been prey to war and insurgency since the overthrow of Saddam Hussein in 2003. As a result, Iraqis are reluctant to use banks in case violence prevents them accessing their cash or restrictions are placed on withdrawals.

Many Iraqis also worry they that might lose their savings in the event of a bank collapse.

Last year, the government stopped payments to bank branches in areas held by Islamic State, the militant group that controls swathes of territory in northern and western Iraq.

The central-bank supervised fund will have a capital of 100 billion dinars and will collect a certain percentage of the deposits held by the private and state-owned banks, it said, without indicating the amount.

About 70 percent of total private sector bank deposits are now held in state banks, according to the central bank. ($1 = 1,167.0000 Iraqi dinars) (Reporting by Saif Hameed; Writing bv Maher Chmaytelli)