The Licensing of Digital Banks in Iraq
Banking & Finance / Iraq
As technology continues to shape the banking industry, the licensing of digital banks opens the door further for banks in Iraq to move forward.
Law Update: Issue 369 - Real Estate & Construction and Hotels & Leisure
Dana AbduljaleelPartner, Banking & Finance
Nawar Al-AmeriTrainee Lawyer,Banking & Finance
As technology continues to shape the banking industry, the licensing of digital banks opens the door further for banks in Iraq to move forward. Last April, the Central Bank of Iraq (CBI) issued the Regulation on the Licensing of Digital Banks of 2024 (the “Regulation”), which came shortly after licensing the first digital bank of its kind in Iraq.
This article explores the newly issued Regulation, in addition to the caps, limits, and restrictions that it has imposed on digital banks.
Although digital banks will be subject to the same standards as traditional banks, such as financial solvency, exposure and risk, and BASEL standards, the applicability and variation of these standards will remain dependent on their type, their classification as local or Islamic, and/or the existence of foreign branches. Nevertheless, digital banks will operate under a different license that will not restrict their activity to a large extent. However, due to the nature of their operations, some aspects will be subject to either more leniency or restrictions.
Digital banks will be subject to applicable banking laws, Anti-Money Laundering (AML) laws, Islamic banking laws (if the digital bank is an Islamic Digital Bank), and any and all relevant banking laws and regulations, including, inter alia, applicable mobile application regulations and the relevant sectorial authority’s instructions. As such, this allows Joint Stock companies to be licensed as digital banks, subject to the same laws, instructions, and regulations.
The CBI has set a maximum limit on the number of total licensed digital banks, which is currently set at 10% of total licensed banks in Iraq. Below are a few more of the main restrictions, limits, obligations, and rights of digital banks:
Banking Agencies: Digital banks may use banking agencies, pending the Central Bank of Iraq’s (CBI) approval (same as Non-Banking Financial Companies).
Banking Facilities and Withdrawals’ Caps: Banking facilities provided by digital banks may not exceed 50,000,000 Iraqi Dinar (IQD) per client, even if the banking facility is provided through a banking agency. Withdrawals are capped at 100 USD a day and 1,000 USD a month.
Board of Directors:
A member of the board must hold no fewer than 100,000,000 shares in the bank, and these shares will be designated to guarantee the rights of the company, shareholders, creditors, and others against any liabilities that fall on the members of the board.
Members of the board are subject to the same standards as traditional banks. Additionally, members of the board and the executive management are personally liable for all losses and damages incurred by the bank or others that are caused by their intent to damage them, neglect, failure in performing duties, concealing information relevant to the bank’s operation, or providing falsified or misleading information about the bank to the shareholders or the bank. The bank will be jointly liable for the damages and losses incurred, and the CBI may file a lawsuit on behalf of the shareholders of the bank against everyone that caused the damages and losses.
Unlike Traditional Banks, members of the board, along with the executive directors, may not benefit from any advantage whatsoever, and they are subject to the same policies, standards, and requirements of the bank.
Branches: Digital banks may not open branches and are confined to general management (for national digital banks) and headquarters (for foreign branches of digital banks).
Capital: Digital banks’ minimum capital is set at 100,000,000,000 IQD (which is 40 percent of the minimum capital of traditional banks – 250,000,000,000 IQD). This capital shall be paid in five (5) yearly installments, each being 20,000,000,000 IQD.
Financial Brokerage: Digital banks that obtain the CBI’s license for digital brokerage may obtain a license from the Iraqi Stock Exchange if they wish to expand their activity to include financial brokering.
Foreign Digital Banks: Foreign digital banks may open a branch of a digital bank in Iraq, provided that they are licensed for the same in their country of origin, and this branch will be subject to the same standards and regulations as a national Iraqi digital bank.
Islamic Digital Banks: Digital Islamic banks are bound by the same standards and regulations that apply to Islamic banks and are confined to them.
Limitations on Legal Persons: The dealings of digital banks with legal persons are limited exclusively to the collection of their sales.
Standards: Digital banks are subject to the same standards as traditional banks, such as financial solvency, liquidity, etc., and are subject to the CBI’s instructions and regulations.
Shares & Shareholders:
The number of shareholders may not be less than twenty (20) persons, noting that no shareholder may hold more than 5 percent of the shares, directly or indirectly.
The presence of foreign shareholders is permissible, provided it is up to the standard cap of 49 percent of the shares.
Companies that hold shares in the digital bank may be exempt from the two aforementioned limitations, subject to the CBI’s approval.
A traditional bank must hold at least 30 percent of the digital bank’s total shares.
No affiliated persons or the companies of a shareholder may hold more than 20 percent of the shares.
A board member must hold at least 100,000,000 shares.
The Government of Iraq has amended the Electronic Payment Regulation (the “Amendments”), which notably founded the “Supreme Committee for Digital Transformation” and imposed a restriction on various governmental entities from accepting payments in cash, requiring them instead to accept payments via the banking system. This has been gradually put into effect over the last year and has been applicable to more governmental bodies since.
The CBI has further restricted the withdrawal of government officials’ bonuses, overtime work compensation, and any compensations other than salaries to 80 percent, while the remaining 20 percent will be made available for use through the banking system for transactions such as purchases, but they may not be withdrawn at any time.
As for the private sector, the Amendments set out that companies must have a point of sale (POS) device available in every location, and this has been enforced passively through the sectorial authorities through various means such as withholding renewed licenses until a company has met this requirement.
The newly issued regulation was introduced to address regulatory gaps following the licensing of the first digital bank of its kind in Iraq by the CBI. Digital banks are typically governed by banking laws and regulations; however, they face additional restrictions due to their digital nature. Nonetheless, this adapts the regulatory framework in Iraq to the global evolution and integration of technology among various sectors, most prominently the banking ecosystem.
For further information,please contact Dana Abduljaleel and Nawar Al-Ameri.
Published in June - July 2024
