Amid reconstruction efforts, Iraq builds its Islamic finance industry

Left in ruins after 15 years of conflicts, Iraq’s long rebuilding efforts include the construction of its Islamic finance industry with a Sukuk law in the making and a push for a larger Islamic banking market share. MARC ROUSSOT has more.

With the fall of Baghouz, ISIS lost its last stronghold in Syria, marking the end of the self-proclaimed caliphate. The Jihadi-inspired extremist group had already been officially defeated in Iraq in November 2017. Over a year after the liberation of the Anbar and Nineveh provinces, the dust has settled and the country is working on its reconstruction — a new phase in which Islamic finance could play an important role.

A Sukuk law is expected to be introduced by June once the State Consultative Council has given its nod. Developed since 2017 by the Central Bank of Iraq (CBI), the bill is paving the way for both sovereign and corporate Sukuk. Its introduction would be timely as Iraq is in dire need of funds to pay engineering and construction companies working among the ruins to refurbish water and electricity supply, roads, schools and hospitals, among others.

Work is well under way to repair and rebuild infrastructure and homes according to UN Habitat but the overall reconstruction comes with a price tag of US$88 billion while Iraq’s allies only pledged US$30 billion during a conference held in Kuwait in February last year.

Tapping private funding will be pivotal to bridge, at least partly, the US$58 billion funding gap and Sukuk could help achieve that. Although concrete plans have yet to be put forward, a sovereign Sukuk facility could be issued as early as 2020, shares Dheyaa Salim Beda, the head of bank performance analysis and risk monitoring at the CBI.

Springing up like mushrooms
Iraq is rich in oil and Prime Minister Adil Abdul-Mahdi can count on petrodollars to finance the reconstruction of his country, one of his priorities. But Iraq is also rich in Islamic banks willing to take an active role in funding the development of infrastructure and real estate projects.

To date, 29 Islamic banks with US$7.24 billion in assets are serving a population of 40.11 million inhabitants. In addition, nine remittance companies are currently converting into four Islamic banks with the process expected to end in 2019–20.

Islamic banks started mushrooming when a dedicated Islamic banking law was voted in 2015 followed by the introduction of the CBI’s Strategic Plan 2016–20. The framework aims to bring the industry onto a level-playing field with its conventional counterpart. It also intends to grow the country’s Islamic banking market share, which reached 7.35% of total assets amounting to US$98.46 billion.

However, the real boost came from the implementation of the Financial Action Task Force’s recommendations encouraging remittance services to become a simple service of banks, which are subject to stronger regulations and standards on money laundering and terrorism financing. Hence, the initiative triggered a wave of conversions of remittance companies into Islamic banks.

Small is beautiful
However, Iraq’s ballooning Islamic banking industry is likely to deflate due to stringent capital requirements expected to provoke a broad consolidation movement in the next few years.

The CBI’s regulations mandate Islamic banks to have a minimum capital of US$80 million and to increase it to US$220 million within three years after establishment. Islamic banks not complying with this rule could simply lose their license.

With the forthcoming merger and acquisition movement, it will take many years for Iraq’s Islamic banking industry to stabilize, perhaps as long as the reconstruction of the country.

This article first appeared in IFN Volume 16 Issue 13 on the 3rd of April 2019

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