For all the sectarian violence gripping Iraq, Sharia-compliant banks operating in the nation see opportunities for growth.
Elaf Islamic Bank, the 14-year-old Baghdad-based lender, is targeting a 28 per cent increase in profit this year, even as rival Cihan Bank said its income dropped last year as rebels seized parts of the country.
Iraq's cabinet approved a draft law on Tuesday regulating the Sharia-compliant banking industry, which will now move to the country's parliament for passage.
Airlines cancelled flights to Baghdad on Tuesday after a United Arab Emirates passenger jet was shot at, highlighting the growing security threat in a country where IS group has declared a caliphate. Amid the strife, at least eight Sharia-compliant lenders are operating, including Abu Dhabi Islamic Bank, seeking to tap a population of 36 million that has one of the lowest penetrations of formal banking in the Middle East.
"It's a high-risk market, but at the same time there's strong potential," Montasser Khelifi, a Dubai-based senior manager at Quantum Investment Bank, said by phone. "There is a huge population, it's a big country with important oil resources. But the banking market is still not developed."
About 11 per cent of Iraqis aged 15 years and older have accounts at formal banking institutions, according to World Bank data, compared to about 60 per cent in the UAE.
Elaf expects to increase income to about $15 million this year from $11.7 million in 2014, according to Manjula Mathew, the bank's executive director of research, investments and asset management. Kurdish International Bank's profit increased 5 per cent to $36.7 million in 2014, according to chief executive officer Bustam Al Janabi. Cihan's earnings fell 37 per cent to $22.6 million, said deputy chief executive officer Naz Bajger.
Iraq's Islamic banks are still in their early phase and "the challenges are acute, but the opportunities are enormous," Mohieddine Kronfol, the Dubai-based chief investment officer for global sukuk and Mena fixed-income at Franklin Templeton Investments, said by phone. "We find that Islamic banks, wherever they operate, they tend to grow faster than conventional in acquiring market share."
Iraq's lenders have been constrained by the dearth of legislation governing Islamic banks and advances by IS, which threaten to drag the country into the worst sectarian conflict since 2007. The central bank said it will spend $4.2 billion to support economic activity and create jobs as the nation also grapples with oil prices close to the lowest in six years.
The yield on Iraq's 2028 dollar bond rose 37 basis points this year to 8.3 per cent. That compares to a 28 basis-point decline through January 27 to 4.1 per cent in the average yield of Middle East bonds, according to JPMorgan Chase indices.
Iraqi Prime Minister Haidar Al Abadi said this month that the country's economic recovery isn't complete and the fight against IS is far from over, more than a decade after the fall of Saddam Hussein.
"The challenges are huge," he told Bloomberg TV's Charlie Rose on January 23. "Our economy cannot sustain two major spendings. One is to sustain our society and two is to sustain this awful war. We need help on this."
Abu Dhabi Islamic Bank, the second-biggest Sharia-compliant lender in the UAE, has been operating in Iraq since 2012 and is taking a long-term view of the country where it sees "great potential," Nuhad Saliba, head of ADIB International Banking Group, said. Cihan Bank said its outlook improved toward the end of last year as the United States began airstrikes on IS.
"The last quarter of the year was better," Bajger said by phone from Erbil. "The first half of the year will be tough, but I can say that it would not be hard as the third quarter of 2014.
(Times Of Oman / 28 January 2015)
Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com