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Saturday, 30 May 2009

Iraq Islamic banks urge law reform to boost growth

BAGHDAD, May 29 (Reuters) - There is huge potential for Islamic finance in Iraq, banking officials said, and the country's central bank said it was looking at ways to encourage the sector's growth in response to demands from Islamic banks.
Islamic banks first opened in Iraq in the 1990s and seven of the country's 42 banks are now Islamic, meaning they comply with Islamic laws prohibiting interest, the trading of debt and investment in some sectors, such as pornography and alcohol.
"There is a great demand for Islamic banks in Iraq. The problem is Iraqi banking law does not differentiate between regular and Islamic banks," Iraqi central bank senior advisor Mudher Kasim said in an interview this week.
"The central bank at the moment is studying a new law for Islamic banks," he added, giving no timeline.
Iraqi society has become more religious since the 1990s, and clerics and Islamist groups wield great influence.
Demand from the world's 1.3 billion Muslims for investments that comply with their beliefs has soared and assets that comply with Islamic law are estimated to be worth up to $1 trillion.
The central bank's move is in response to Islamic banks' requests to loosen broader banking rules on the size and type of investments they can make relative to capital and cash reserves.
The rules are meant to ensure banks are solvent, but Islamic banks derive much of their profits from investments, which are distributed among account holders in place of interest.
Iraqi law restricts investment in real estate, where Islamic banks in the Middle East have concentrated much of their cash in recent years, to no more than 15 percent of capital, Kasim said. He said that was one area of Iraqi banking law under review.
Abdul-Hussein al-Rabaie, of Iraq's Al-Bilad Islamic Bank for Investment and Finance, said business had soared since it opened in 2006, but legal constraints have hampered further growth.
Another law restricts total investments to less than 20 percent of capital and cash reserves.
"We have problems with the central bank. I want to take part in development and investment in Iraq, but I cannot have a ceiling on investment," he said, adding that Iraq's Islamic banks were pushing for a cap of 50 percent.
They are also pushing for a cut in the reserve requirement for Islamic banks to 15 percent of capital and cash reserves, from 25 percent now, and for looser capital adequacy rules.
Basel II international banking guidance says an institution's total regulatory capital must be at least 8 percent of its risk weighted assets, based on measures of its credit risk, market risk and operational risk.
Rabaie said the equivalent figure in Iraq was 12 percent, and argued that Islamic banks should be given more leeway because they took less risk than non-Islamic banks.
Islamic laws have largely shielded Islamic banks from investments that have crippled other banks, such as collateralised debt obligations, by requiring deals to be backed by tangible assets and shunning the trading of debt.
But some analysts argue that the sector's focus on real estate and the relative shortage of assets that comply with Islamic law means Islamic banks face other risks.
Bilad has about 7,000 account holders, whose deposits rose to about 358 billion Iraqi dinars ($306 million) by the end of 2008 compared to 58 billion dinars a year earlier.
Its capital had quadrupled to 100 billion dinars since its foundation, and it expects to hit 200 billion dinars in 2010.
Although the figures are tiny by global standards, private Iraqi banks are beginning from a low base after years of war.
Private banks also face an uphill task competing with Iraq's much bigger and better funded state banks, Rafidain and Rasheed.
Last month Boston Consulting Group, which advises financial institutions providing Islamic services, said banks in the Middle East and Asia were looking at opportunities in Iraq. ($1 = 1170 Iraqi dinars)
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