Despite all the instability and continued sectarian violence in parts of Iraq, the country’s few Shariah-compliant lenders see chances to expand their business in a banking industry that can be called rudimentary at best.
As a result of the ongoing internal conflicts since the toppling of the regime in 2003 by the US, Iraq has been widely reduced back to a cash economy where bank financing – whether conventional or Islamic –is unavailable for all but the biggest companies. Cash payments and transfers keep dominating the economic system because the majority of the population does not have a bank account, let alone debit or credits cards.
According to World Bank data, just about 11% of Iraqis use the services of formal banking institutions. In addition to that, many banks face restrictions in international payments as a result of the attempts by the world community to cut off financial supply to extremist groups operating in the country. Tumbling oil prices and the global financial crisis weren’t helpful either to provide relief for what some have called “banking dystopia” in Iraq.
However, particularly Shariah-compliant financial institutions feel that from such a low level, there is only one direction for the banking market: Up! They reckon that a large proportion of the Iraqi population does not use banking services because most of them come as conventional banking services that fail to comply with the provisions of Islamic law.
Now that the Iraqi government makes moves to pass obligatory Islamic banking regulations and also approved the development of the first government-owned Islamic bank under the supervision of the central bank, the currently around ten Islamic lenders (versus 36 conventional banks) including foreign banks such as Abu Dhabi Islamic Bank and the largest Shariah-compliant commercial bank, Iraqi Islamic Bank For Investment & Development, see light at the end of the tunnel.
Among them are Elaf Islamic Bank, a 14-year-old Baghdad-based Islamic bank, which managed to increase its profit by a third last year, and competitors such as Cihan Bank and National Islamic Bank also saw positive business trajectories.
“Islamic banking has rebounded with great success in many countries, and for the benefit of the Islamic banking in Iraq, Islamic banking laws are necessary to enable banks to exercise commercial activities and to help develop the economy of the country,“ says Ayoob Shaikh Ali AlAraibi, managing executive at Elaf Islamic Bank.
According to Iraqi central bank data, Islamic banks currently account for 1.5% of total assets of Iraqi banks, amounting to nearly 3tn dinars ($2.55bn), and this could grow to nearly 6% in the coming years if the political and economic environment improves and the necessary legislation gets introduced.
However, due to the not-yet-fully-formulated Islamic banking regulations, Iraq’s Islamic banks are still in their early phase, says Mohieddine Kronfol, Dubai-based analyst and investment specialist for Islamic finance at Franklin Templeton Investments, adding that “the challenges are acute in Iraq, but the opportunities are enormous. We have found that Islamic banks, wherever they operate, tend to grow faster than conventional in acquiring market share.”
Islamic banks have, since the early years of their operation in Iraq, been required to comply with the Iraqi Banking Law of 2004, despite the fact that the nature of this law does not take into account the structure of Islamic finance. Some regulations have been added since, for example specifications which activities Islamic banks and Islamic windows are prohibited to carry out, such as the prohibition of dealing with interest and issuing saving accounts, as well as the procedures for establishing a Shariah board.
“There is a draft Islamic Banking Law under review to be passed sometime in the near future,” says Mustafa Muayad, associate and banking expert at Dubai-based law firm and consultancy Al Tamimi & Co.
“This law will regulate the operations of the Islamic banks in Iraq a more thorough manner and also exclude them from taxes and fees arising from dealing in contracts relating to murabaha and ijara deals. All in all, we believe that Iraq is a very promising market for Islamic bank investment,” he adds.