Yet to be defeated, the Islamic State is progressively retreating from Iraq, roads are reopening, trade is inching up and the prospect of a booming reconstruction period following 15 years of conflict that destroyed many key infrastructures is creating a lot of hope for the 30 Islamic banks operating in the country. MARC ROUSSOT reports.
Every day, hundreds of heavily loaded trucks follow the Erbil-Baghdad-Basra corridor. The 900-kilometer road links the north of the country, bordering Turkey and Iran, to the south, where the port of Basra provides an access to the Arabian/Persian Gulf. Erbil, Baghdad and Basra are three strategic cities for Islamic banks to tap the trade finance.
Obtaining its license in May last year, Baghdad-based Al Rajih Islamic Bank, with its first few deals signed in 2017 aimed at supporting the commerce of goods, had initially planned to open a branch in Erbil and another in Basra. However, it may opt for the nearby city of Mosul as tensions have been arising between the central government and the Kurdish authorities, following the Iraqi Kurdistan’s independence referendum held in September last year.
Mosul, the second-biggest city in the country, is also a strategic location, as many opportunities will arise from its reconstruction. The eight-month fierce battle against the Islamic State that ended in July 2017 left the city in ruins. Water and electricity supply, roads, schools, hospitals, residential and commercial buildings — there is a long list of basic and vital infrastructures requiring to be rebuilt or refurbished.
Al Rajih Islamic Bank, which plans to participate in housing projects, is already offering Murabahah financing for the provision of raw materials such as steel for construction projects.
In total, Iraq needs US$88.2 billion for its reconstruction, however, foreign governments have only promised US$30 billion during a pledging conference held last February in Kuwait. This US$58.2 billion funding gap may be partially bridged by the 30 Islamic banks that are currently operating in Iraq.
Shariah compliant financial institutions have been mushrooming over the past few years following the apex bank’s decision to encourage remittance companies to convert into Islamic banks in order to better regulate them, in particular in terms of terrorism financing and money laundering. Since August 2016, at least eight Islamic banks have been established.
“The competition is very tough and it is difficult to differentiate ourselves from other banks,” says Ayman Muhaisen, a consultant to Al Rajih Islamic Bank. An opinion that was also shared by Aml Fares, the acting managing director of Al Qurtas Islamic Bank. “The Iraqi market is a complicated one. This is due to severe competition, the anxiety of the population, and a volatile market,” she says.
“Due to the past geopolitical issues, there is a lack of trust in placing the money in banks. People feel that they might not be able to withdraw their money in cases of emergencies. As a result, they rather keep their money at home or in their shops. Iraq is a very cash-based economy,” Ayman explains.
Nevertheless, Ayman is an optimistic man. “A minimum of US$50 billion will be poured into Iraq for its reconstruction. The price of the barrel is increasing. The exportation of oil is also increasing, reaching around four million barrels a day. This windfall will be used to fund projects within the ambitious National Development Plan of Iraq 2018-22. We will witness a boom in the market and banks are going to benefit from it,” Ayman believes.
In order to ease businesses, the Central Bank of Iraq is also currently working on a dedicated regulatory framework for Islamic banks. The regulations will be based on the law on Islamic finance that was passed in 2015, Mustafa Muayad, an associate with Al Tamimi & Company based in Baghdad, told IFN. The central bank is also working on the setup of a national Shariah board.
Confident about the future of his country and the development of Islamic finance, Ayman believes that Iraq has overcame the majority of its past issues. “Everything is back on track. Of course, there are still minor issues lingering, but it will not affect the overall economy. The situation is calm enough for businesses to run their business regardless of unsolved issues.”
This article first appeared in IFN Volume 15 Issue 16 on the 18th of April 2018